Low-Road Capitalism 5: Private Equity Edition

LewisBraham

Kind of astonishing this kind of stuff is still going on: https://nytimes.com/2023/04/28/opinion/private-equity.html#commentsContainer
An excerpt:

Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone. In nursing homes, where the firms have been particularly active, private equity ownership is responsible for an estimated — and astounding — 20,000 premature deaths over a 12-year period, according to a recent working paper from the National Bureau of Economic Research. Similar tales of woe abound in mobile homes, prison health care, emergency medicine, ambulances, apartment buildings and elsewhere. Yet private equity and its leaders continue to prosper, and executives of the top firms are billionaires many times over.

Why do private equity firms succeed when the companies they buy so often fail? In part, it’s because firms are generally insulated from the consequences of their actions, and benefit from hard-fought tax benefits that allow many of their executives to often pay lower rates than you and I do. Together, this means that firms enjoy disproportionate benefits when their plans succeed, and suffer fewer consequences when they fail.

Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back. As the new owner, Carlyle sold nearly all of ManorCare’s real estate and quickly recovered its initial investment. This meant, however, that ManorCare was forced to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Carlyle also extracted over $80 million in transaction and advisory fees from the company it had just bought, draining ManorCare of money.

ManorCare soon instituted various cost-cutting programs and laid off hundreds of workers. Health code violations spiked. People suffered. The daughter of one resident told The Washington Post that “my mom would call us every day crying when she was in there” and that “it was dirty — like a run-down motel. Roaches and ants all over the place.”

In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees. (In statements to The Washington Post, ManorCare denied that the quality of its care had declined, while Carlyle claimed that changes in how Medicare paid nursing homes, not its own actions, caused the chain’s bankruptcy.)

Carlyle managed to avoid any legal liability for its actions. How it did so explains why this industry often has such poor outcomes for the businesses it buys.

The family of one ManorCare resident, Annie Salley, sued Carlyle after she died in a facility that the family said was understaffed. According to the lawsuit, despite needing assistance walking to the bathroom, Ms. Salley was forced to do so alone, and hit her head on a bathroom fixture. Afterward, nursing home staff reportedly failed to order a head scan or refer her to a doctor, even though she exhibited confusion, vomited and thrashed around. Ms. Salley eventually died from bleeding around her brain.

Yet when Ms. Salley’s family sued for wrongful death, Carlyle managed to get the case against it dismissed. As a private equity firm, Carlyle claimed, it did not technically own ManorCare. Rather, Carlyle merely advised a series of investment funds with obscure names that did. In essence, Carlyle performed a legal disappearing act.

In this case, as in nearly every private equity acquisition, private equity firms benefit from a legal double standard: They have effective control over the companies their funds buy, but are rarely held responsible for those companies’ actions. This mismatch helps to explain why private equity firms often make such risky or shortsighted moves that imperil their own businesses. When firms, through their takeovers, load companies up with debt, extract onerous fees or cut jobs or quality of care, they face big payouts when things go well, but generally suffer no legal consequences when they go poorly. It’s a “heads I win, tails you lose” sort of arrangement — one that’s been enormously profitable.

But it isn’t just that firms benefit from the law: They take great pains to shape it, too. Since 1990, private equity and investment firms have given over $900 million to federal candidates and have hired an untold number of senior government officials to work on their behalf. These have included cabinet members, speakers of the House, generals, a C.I.A. director, a vice president and a smattering of senators. Congressional staff members have found their way to private equity, too: Lobbying disclosure forms for the largest firms are filled with the names of former chiefs of staff, counsels and legislative directors. Carlyle, for instance, at various times employed two former F.C.C. chairmen, a former S.E.C. chair, a former NATO supreme allied commander, a former secretary of state and a former British prime minister, among others.

Such investments have paid off, as firms have lobbied to protect favored tax treatments, which in turn have given them disproportionate benefits when their investments succeed. The most prominent of these benefits is the carried interest loophole, which allows private equity executives to pay such low tax rates. The issue has been on the national agenda since at least 2006, and three presidents have tried to close the loophole. All three have failed.

msf

"Mr. Ballou is an attorney and the author of the forthcoming 'Plunder: Private Equity’s Plan to Pillage America,' from which this essay is adapted."

Not to be confused with: "Financial journalist Gretchen Morgenson explain[ing] how private equity firms buy out companies, then lay off employees and cut costs in order to expand profits. Her new book is These are the Plunderers."

Fresh Air interview with Gretchen Morgenson, April 26th, transcript and audio:
https://www.npr.org/2023/04/26/1172164997/how-private-equity-firms-are-widening-the-income-gap-in-the-u-s

Morgenson's book was released one week before Ballou's. Curious timing and similarity of titles. Both authors use the same ManorCare example in their excerpt/interview.

If the MOs of these firms sound familiar, there's a reason. It's a rebranding. Morgenson says: "Private equity firms are what used to be called leveraged buyout funds and firms". Yes, it's still going on, and has been going on for decades.

The revolving door that Ballou describes in the excerpt quoted swings both ways. It's not just PEFs hiring " former chiefs of staff, counsels and legislative directors".

Gross: [Trump] appointed Jay Powell to head the Federal Reserve. What's Jay Powell's connection to PEFs?

Morgenson: Jay Powell was an executive - a high-ranking executive at the Carlyle Group in Washington for several years. So he definitely has, you know, the mindset of private equity. Donald Trump also had, as a very high-level adviser to him, Steve Schwarzman, who is the co-founder of the Blackstone Group. You would often see Steve at Donald Trump's, you know, right or left hand when they were having meetings about business. So, you know, these firms do have a lot of clout and power in Washington.

LewisBraham

This sort of heads-I-win-tails-you-lose capitalism where pe firms have structural advantages on the way up and are completely insulated from the legal and financial consequences on the way down is not what Adam Smith originally envisioned. The sad thing about it is with a short-term corporate raider mentality where pe firms seek to scrap companies and sell their parts, they destroy many viable businesses, costing thousands of jobs and, apparently, human lives. It all seems so unnecessary.

hank

Wasn’t Michael Price’s approach similar? Maybe an early purveyor?

LewisBraham

Raiding has been going on for a long time. Firms have just increased in size and political/economic influence and have benefited from an utter lack of accountability and an uneven playing field. The 80s films Wall Street addressed raiding where a still viable airline company Blue Star is to be chopped up and sold for parts:

sma3

I was personally affected when in 2015 Prospect Medical Holdings ( owned by Leonard Green a PE firm) bought our CT hospital after two previous publicly traded companies "suitors" ( hoping to buy both hospitals in town) had been chased off by the left wing Democratic Governor. The hospital was close to going under.

The two previous offers were to build an entirely new hospital and combine both institutions, so they would not longer undercut each other in our small city. These offers were far superior and could have been much better monitored because they involved public companies and a pension fund. Unfortunately, the CT governor was beholden to our hospital union and threw up all sorts of crazy conditions, so they backed out.

We got all sorts of promises about capital infusions etc from Prospect but none materialized.

We sold our practice to the hospital/Prospect in 2018. At the physician level Prospect was fairly benign, although they refused to buy any new equipment like scanners and computers. I retired, in 2019 after 40 years of practice that I loved, because the electronic medical record required me to work to 9PM just entering data. They refused to pay $20 an hour to hire a scribe to help me. It was apparently far more efficient to make a physician do the work of a clerk. Both of my replacements have quit in less than a year.

Since then, Leonard Green had Prospect to borrow $1.2 Billion in 2019. Prospect paid Green and the chief executive a $675 million dollar dividend. Prospect CEO alone got $90 million. To pay the loan back, Prospect sold all their hospitals to Medical Properties Trust (MPW) and then leased them back. By 2021 they had stop paying rent, and MPW stock is down to $8 from $25.

Two Prospect hospitals in Delaware ( one the only source of care for 80,000 people I think) and three in Texas have closed completely. Rhode Island AG refused to let them sell the two there until they put up $80 million in escrow.

MPW is unloading the CT hospitals to Yale New Haven Hospital for the amount it paid for them in 2020, because Yale doesn't want the other big CT system, Hartford Hospital to get them. The hospitals in Delaware and Texas are closed for good.

As I have posted before, ProPublica has done an excellent series on Prospect documenting the millions Green got, but Prospect didn't have cash to buy gas for the ambulances.

https://www.propublica.org/article/rich-investors-stripped-millions-from-a-hospital-chain-and-want-to-leave-it-behind-a-tiny-state-stands-in-their-way

Another excellent source on the abuses of PE I have found is

https://pestakeholder.org/

LewisBraham

Good article: https://nytimes.com/2023/06/15/magazine/doctors-moral-crises.html

An excerpt:

Because doctors are highly skilled professionals who are not so easy to replace, I assumed that they would not be as reluctant to discuss the distressing conditions at their jobs as the low-wage workers I’d interviewed. But the physicians I contacted were afraid to talk openly. “I have since reconsidered this and do not feel this is something I can do right now,” one doctor wrote to me. Another texted, “Will need to be anon.” Some sources I tried to reach had signed nondisclosure agreements that prohibited them from speaking to the media without permission. Others worried they could be disciplined or fired if they angered their employers, a concern that seems particularly well founded in the growing swath of the health care system that has been taken over by private-equity firms. In March 2020, an emergency-room doctor named Ming Lin was removed from the rotation at his hospital after airing concerns about its Covid-19 safety protocols. Lin worked at St. Joseph Medical Center, in Bellingham, Wash. — but his actual employer was TeamHealth, a company owned by the Blackstone Group.

E.R. doctors have found themselves at the forefront of these trends as more and more hospitals have outsourced the staffing in emergency departments in order to cut costs. A 2013 study by Robert McNamara, the chairman of the emergency-medicine department at Temple University in Philadelphia, found that 62 percent of emergency physicians in the United States could be fired without due process. Nearly 20 percent of the 389 E.R. doctors surveyed said they had been threatened for raising quality-of-care concerns, and pressured to make decisions based on financial considerations that could be detrimental to the people in their care, like being pushed to discharge Medicare and Medicaid patients or being encouraged to order more testing than necessary. In another study, more than 70 percent of emergency physicians agreed that the corporatization of their field has had a negative or strongly negative impact on the quality of care and on their own job satisfaction.

There are, of course, plenty of doctors who like what they do and feel no need to speak out. Clinicians in high-paying specialties like orthopedics and plastic surgery “are doing just fine, thank you,” one physician I know joked. But more and more doctors are coming to believe that the pandemic merely worsened the strain on a health care system that was already failing because it prioritizes profits over patient care. They are noticing how the emphasis on the bottom line routinely puts them in moral binds, and young doctors in particular are contemplating how to resist. Some are mulling whether the sacrifices — and compromises — are even worth it. “I think a lot of doctors are feeling like something is troubling them, something deep in their core that they committed themselves to,” Dean says. She notes that the term moral injury was originally coined by the psychiatrist Jonathan Shay to describe the wound that forms when a person’s sense of what is right is betrayed by leaders in high-stakes situations. “Not only are clinicians feeling betrayed by their leadership,” she says, “but when they allow these barriers to get in the way, they are part of the betrayal. They’re the instruments of betrayal.”

Not long ago, I spoke to an emergency physician, whom I’ll call A., about her experience. (She did not want her name used, explaining that she knew several doctors who had been fired for voicing concerns about unsatisfactory working conditions or patient-safety issues.) A soft-spoken woman with a gentle manner, A. referred to the emergency room as a “sacred space,” a place she loved working because of the profound impact she could have on patients’ lives, even those who weren’t going to pull through. During her training, a patient with a terminal condition somberly informed her that his daughter couldn’t make it to the hospital to be with him in his final hours. A. promised the patient that he wouldn’t die alone and then held his hand until he passed away. Interactions like that one would not be possible today, she told me, because of the new emphasis on speed, efficiency and relative value units (R.V.U.), a metric used to measure physician reimbursement that some feel rewards doctors for doing tests and procedures and discourages them from spending too much time on less remunerative functions, like listening and talking to patients. “It’s all about R.V.U.s and going faster,” she said of the ethos that permeated the practice where she’d been working. “Your door-to-doctor time, your room-to-doctor time, your time from initial evaluation to discharge.”……

Forming unions is just one way that patient advocates are finding to push back against such inequities. Critics of private equity’s growing role in the health care system are also closely watching a California lawsuit that could have a major impact. In December 2021, the American Academy of Emergency Medicine Physician Group (A.A.E.M.P.G.), part of an association of doctors, residents and medical students, filed a lawsuit accusing Envision Healthcare, a private-equity-backed provider, of violating a California statute that prohibits nonmedical corporations from controlling the delivery of health services. Private-equity firms often circumvent these restrictions by transferring ownership, on paper, to doctors, even as the companies retain control over everything, including the terms of the physicians’ employment and the rates that patients are charged for care, according to the lawsuit. A.A.E.M.P.G.’s aim in bringing the suit is not to punish one company but rather to prohibit such arrangements altogether. “We’re not asking them to pay money, and we will not accept being paid to drop the case,” David Millstein, a lawyer for the A.A.E.M.P.G. has said of the suit. “We are simply asking the court to ban this practice model.” In May 2022, a judge rejected Envision’s motion to dismiss the case, raising hopes that such a ban may take effect

BenWP

The tales above regarding the medical profession are horrifying. Our youngest daughter is in med school and I am concerned for her future.

On a lesser scale, but completely in keeping with the topic of the evils of Private Equity, the Chapter 11 filing of what was once the venerable Instant Pot is the subject of a recent article in The Atlantic. It’s alarming to read about PE screwing up a perfectly good thing.

https://www.theatlantic.com/technology/archive/2023/06/instant-pot-bankrupt-private-equity/674414/

msf

In December 2021, the American Academy of Emergency Medicine Physician Group (A.A.E.M.P.G.), part of an association of doctors, residents and medical students, filed a lawsuit accusing Envision Healthcare, a private-equity-backed provider, of violating a California statute that prohibits nonmedical corporations from controlling the delivery of health services. Private-equity firms often circumvent these restrictions by transferring ownership, on paper, to doctors, even as the companies retain control over everything, including the terms of the physicians’ employment and the rates that patients are charged for care, according to the lawsuit. A.A.E.M.P.G.’s aim in bringing the suit is not to punish one company but rather to prohibit such arrangements altogether.

From Envision's recent (May 15) press release:

Envision Healthcare Corp. (“Envision”) today announced it and certain of its wholly owned subsidiaries have filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Envision has entered into a Restructuring Support Agreement (RSA) with its key stakeholders supported by more than 60 percent of the company’s approximately $7.7 billion in debt obligations and expects that support will continue to grow in the coming days. The terms of the RSA establish the framework for a consensual and comprehensive restructuring that will position Envision and AMSURG for future growth as two separate businesses.
...
Under the terms of the RSA, the AMSURG and Envision Physician Services businesses will be separately owned by certain of their respective lenders. AMSURG will purchase the surgery centers held by Envision for $300 million plus a waiver of intercompany loans held by AMSURG LLC. All of Envision’s debt, with the exception of a revolving credit facility for working capital, will be equitized or cancelled, deleveraging approximately $5.6 billion.
...
2018 acquisition by KKR & Co.,

https://www.envisionhealth.com/news/2023/envision-healthcare-reaches-restructuring-agreement

It looks like that restructuring will create problems for the suit: who are the defendants now?

The private-equity backer is KKR, best known for its RJR Nabisco leveraged buyout. (See Barbarians at the Gate.)

The bankruptcy wipes out private equity firm KKR’s investment in Envision. In 2018, the PE firm shelled out over $5 billion in 2018 to take Envision private, in a deal valued at $9.9 billion including debt. Last week, The Wall Street Journal reported that an Envision bankruptcy filing would be one of the steepest losses in KKR’s history.

https://www.healthcaredive.com/news/envision-chapter-11-bankruptcy/650277/

Interesting that these two deals serve as KKR bookends, with cofounders Henry Kravis and George Roberts having stepped down not too long ago.

Repeating the Gretchen Morgenson quote in my earlier post:"Private equity firms are what used to be called leveraged buyout funds and firms."